Thursday, July 30, 2009

Another blow to the "unbeatable" life insurance viatical shemes

Kim Miller, writer for the Palm Beach Post, deserves credit for keeping on top of the unfolding Barry Kaye situation (which in turn should send really strong messages to the philanthropic community to stay away from various insurance schemes, particularly ones involving viatical settlements).

Here is the most recent story on Mr. Kaye:

http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/07/29/0729barrykaye.html

Apparently, he is being sued by an 81-year-old who bought a $5 million life insurance policy in 2006 on the promise from Mr. Kaye that they would be able to sell that policy for profit after two years.

This suit isn't directly about charities but the type of plan that the suit involves is very similar to ones that Mr. Kaye and many, many others have been promoting over the past few years. Can't lose propositions? Yea, right. Imagine if your institution "invested" a few hundred thousand in premiums on the expectation of healthy profits after two years, only to find that there is no market for these policies anymore. Finally, we have some evidence that these viatical schemes might be "dead in the water" because nobody is buying anymore (the big buyers of these policies was supposedly places like AIG - solid company...).

Anyway, for those interested in the time-line of Barry Kaye's giving to FAU, check out this link to the Palm Beach Post:

http://www.palmbeachpost.com/localnews/content/local_news/epaper/2009/06/12/0612kayetimeline.html

I don't think this story is over by a long shot.

Wednesday, July 29, 2009

Really funny tax blog

For those who think taxes and a good laugh can go together, check out this blog post by the Tax Girl blog:

http://www.taxgirl.com/joan-rivers-cher-in-trouble-congress-to-tax-plastic-surgery/

Her blog was an inspiration for mine and I actually read almost all of her posts (which are a lot). Her site helped me find an answer to avoid income taxes on $67,000 of debt forgiveness that my accountant was having trouble with. I would at least bookmark her page just in case you are researching a tax question. The blog is a treasure trove of answers to various tax questions.

OK, I am really a tax nerd at heart, too, just nobody would hire me as a tax attorney out of law school because I didn't have an accounting or tax background. So I ended up in planned giving, which gives me the opportunity to dabble in sticky tax issues without ever having to take an accounting class.

Grandiose Insurance Plans - Think Again

For those following a few of my previous posts on charitable insurance schemes (click on the "insurance schemes" label in the left column), and particularly the apparent "slipping" of Barry Kaye's insurance empire, here is the latest out of Palm Beach on Mr. Kaye:

http://www.sun-sentinel.com/news/palm-beach/boca-raton/sfl-barry-kaye-fau-072809,0,7411472.story


Actually, the story isn't so damning in regards to Mr. Kaye. Basically, he is paying one more million towards his $16 million pledge to FAU - bringing his total giving to $5 million and they are writing off the rest of the pledge, and his name is coming off school of business. In this regard, Mr. Kaye has shown that he is trying to do the right thing.

Why the article is important is how it touches on the conflicts of interest created by Mr. Kaye's insistence on promoting his insurance programs at the university after he made his pledges. The story also confirms that the grandiose plans that many of us heard directly from Barry weren't as guaranteed as he made them out to be.

In my mind, he is one of the good guys in the whole charitable insurance scheming world. He actually gave significant money to charity (albeit with some strings). My concern is for the not-so-good insurance guys out there - who really have only one thing in mind when they sell their "too good to be true" schemes: money in their pockets. And, when these things implode, as they always do, the charity or the donor will be left "holding the bag."

Sorry insurance sales guys of the world - I am not convinced that your convoluted plans makes sense for any charity to get involved. I don't even need to see your power point presentation or read your half inch think binder of crossword puzzles. I know its risky, a waste of time, a waste of resources, a waste of relationships, and so on. There is no replacement to good old fundraising, for sure not coming from the insurance industry.

Tuesday, July 28, 2009

Almost quoted in the Wall Street Journal!

Well, this blog is getting around. A reporter from the Wall Street Journal contacted me after seeing one of my previous posts: Gift Administration Revolving Door (http://plannedgift.blogspot.com/2009/07/gift-administration-revolving-door.html )

Here is a link to the story she wrote: http://online.wsj.com/article/SB10001424052970204563304574314882717782344.html?mod=googlenews_wsj

Last night, she emailed the same story, but with a quote from me in the last line of the piece. Not there this morning. Oh well - there will be other times to get my name in print.

Check out the story. Interestingly, in speaking with a provider yesterday about this same topic, I was reminded that State Street Bank also had a "house cleaning" a few years ago, too.

This whole area of banks dropping clients or even dropping out of the business altogether makes the case for a charity to maintain its own level of expertise in-house or at least through a consultant. Self serving, yes, but true. You can't rely on banks to run your planned giving program. They can take most of the administrative/investment burden off your shoulders - a must for bigger programs - but it is still your program. I am always wary of banks that sell themselves providing planned giving consulting services along with the administration and investment. As I have said before, banks have no interest in the primary area of planned giving revenue - bequests - so what kind of program advice are they going to give you?

Monday, July 27, 2009

Art and other tangible property gifts

My day started with a call about a donated work of art, already in possession of the charity (not a good sign), at significant moving expense (another not good sign), from a donor with no previous giving history (a 3rd not good sign!) who is demanding that the charity provide a dollar figure for deduction purposes in the acknowledgment letter and refused to get his own appraisal (but wants a deduction - the worst of all signs). This is a really common situation and it would be easy for me to suggest that they just go with their standing gift acceptance policy - no valuations provided for gifts of art.

Problem with that advice is that in the real world, development professionals are in the business of keeping donors happy, making friends (not enemies), and exploring development opportunities when they arise (and not everyone has many of those today).

My first question - is it worth $5,000 or less? Answer: donor thinks its worth up to a $100,000; development officer has no idea what it is worth. (read part II below to see why that is important)

Second question: what are you planning to do with it? Answer: permanently place it in a new building - no intentions of selling. (read part I below to why that is important)

In case you are wondering if I am going to discuss the related use rule - the answer is no (this case doesn't involve the related-use rule - they have a museum, the piece completely fits in with theme of the institution)

The question here is about acknowledging art and other tangible personal property when the donor is not cooperating the way we would always like. Seeing that the development officer was in a bind, we came up with the following:

Let's find out about adding this piece of art to the institution's insurance policy - maybe they require some sort of appraisal. Find out the cost of obtaining an appraisal for insurance purposes. And then make a decision. If the cost is relatively low and the institution would get one anyway - to insure the piece - then get the appraisal. Then we draft a letter that carefully states the facts very accurately so that it is clear in the letter that the appraisal and value we came up with is for our own purposes and that he should seek his own counsel to determine the deductibility of the gift.

Or, the decision is not to spend anything on the appraisal and stick with the gift acceptance policies "come hell or high-water" (i.e. live with the consequences that not every donor can be made happy).

The lawyers and lawyer-ly minded people reading this blog are probably screaming in their heads - how can I even suggest putting any dollar amount in the letter? Well, firstly, anyone reading this blog needs to seek their own legal counsel - my own caveat. Besides being a lawyer myself, I seek legal counsel too and the advice I got was that if forced, just describe where you got the valuation from and put in the CYA caveats in the letter. It is not ideal and I told the caller that they may just want to hold their ground and accept the consequences.

This situation probably would not have reached me if the charity knew of the donor's demands BEFORE accepting the gift. It shows you how important it is to have a gift acceptance policy that "ties your hands" before accepting such gifts.

Anyway, I am including two short pieces below I wrote earlier this year about tangible property gift rules. These will all be chapters in my book! My blog book that I am writing and will somehow compile as a guide to planned giving.

And, don't forget to forward links of these blog posts around! I am still in the proving phase of this blog and the more readers, the better chance it will survive and get better.

Part I - Selling Donated Art and Other Tangible Property Gifts

In light of recent stories in the press about some universities selling donated works of art to replenish endowments, we thought this would be a good opportunity to revisit this thorny question. Many of us may have missed an important change to charitable giving laws in the 2006 Pension Protection Act (“PPA”) regarding gifts of tangible personal property like artwork or even equipment.

Generally, donors receive a fair market value deduction if their tangible property gifts have a “related” use to your institution – otherwise the deduction is limited to the donor’s adjusted cost basis (in other words – the original purchase price of the item). Many of us recall that a separate rule requires a charitable recipient of such gifts to file a form (Form 8282) with the IRS when your institution sells or otherwise disposes of the property within 2 years (the IRS’ way of red flagging overvaluations or improper related use gifts).

That was generally the law prior to the PPA. But, the PPA significantly changed both rules, in effect melding both the related use rule and the Form 8282 requirement together. Now, the rule is that any gifted tangible property that is sold or otherwise disposed of within 3 years of the date of gift requires the filing of Form 8282 AND creates a presumption that the donor’s gift was NOT for a related use. In fact, the statute calls for the donor to retroactively lose their deduction taken above their original purchase price.

Part II – Gift Acknowledgment Letters and Qualified Appraisals

Acknowledging gifts of tangible property, including art and in-kind gifts (excluding automobiles which have special rules), can be very challenging and some of the rules are easily forgotten or misunderstood.

There are two general categories: those tangible property gifts valued at or less than $5,000 and those above $5,000. (All gifts less than $250, cash or otherwise, technically do not require even a receipt.)

Tangible property gifts valued at or below $5,000 will require a receipt from your foundation but the donor is not required to obtain a qualified appraisal outside of describing the method used to determine value on his or her tax return.

The second category of tangible property gifts is for gifts valued over $5,000. The donor in these cases is required to obtain a qualified appraisal to claim a charitable deduction for. The appraiser must "hold himself or herself out to the public as an appraiser." The qualifications of the appraiser also must include the ability to appraise the specific type of property involved, and he or she must be independent. The appraiser must not be a party to the gift, and may not be the charitable donee or an employee of either the donor or donee. The appraisal must specifically address the physical condition of the property and the factors appropriate for valuing that type of asset. These are just a summary of the rules involved with qualified appraisals which you can provide to your donor as long as you also include written language urging your donors to seek legal or tax counsel to determine the legal effectiveness of any appraisal obtained for deduction purposes.

As most should know, the qualified appraisal requirement is the responsibility of the donor. You should not attempt to obtain one on behalf of the donor. If pressed, you may need to help your donor find an appropriate appraiser. In such cases, try to provide three appraisers and always include caveat language in writing stating that your donor’s legal or tax counsel should assist the donor in making a final determination as to the qualifications of an appraiser.

Another challenge fundraisers face is when donors request a specific dollar amount in their gift acknowledgment letters, whether for gifts above or below $5,000. In no way should your institution be seen as providing gift valuations. There are potentially serious consequences for your donor and your institution should a fraudulent gift valuation be found by the IRS. Rather, your institution should consider adopting a policy of never providing a dollar amount value in the gift acknowledgment letters of tangible personal property. A full, non-monetary description of the property should suffice.

If your donors are adamant that a dollar amount should be in the letter, then your gift acknowledgment letter can describe the property and then state a value “as provided by your own valuation” or something to that effect. Stating in the letter that the valuation was provided by the donor is an option several attorneys have suggested in these situations – your own charity’s legal counsel should be consulted on this question. Additionally, it is always important to include language in your gift acknowledgment letters that strongly urges donors to seek “independent legal or tax counsel in determining the amount deductible for federal tax purposes.”

Monday, July 20, 2009

You have been warned! Finally, a legal decision that hits directly at gift annuity promotion

Gift planning lawyers are starving for case law because people don't seem to take our warnings very seriously. How many times have you heard lawyers at planned giving conferences warn about how we are promoting charitable gift annuities? About avoiding investment language, how we should be emphasizing the charitable gift in the gift annuity, how we really shouldn't mix up CGAs with anything related to securities (and their SEC regulations).

And, how often do we see gift annuity advertisements extolling "attractive rates." Or, how about "a gift that offers lifetime income ... and beyond." Or, "your annuity payment is determined by your age and the amount you deposit. The older you are, the more you'll receive." Or, language like "current average net-yield."

The thing is, these quotes could be right out of our CGA promotions. But, they were actually taken directly from a U.S. Court of Appeals (Ninth Circuit) opinion in a case just published.

I'll sum up the case for you: there was once a CGA program that was a true ponzi scheme. A guy named Robert Dillie (now serving 121 months in jail) pushed CGAs through investment advisers - giving the investment advisers commissions (big time "no no" under the Philanthropy Protection Act (PPA) of 1995). They raked in $55 million from more than 400 CGAs between 1996 and 2001, and then went belly up. Receiver gets appointed to save what he can to pay back those defrauded. Sues to get back commissions from the investment advisers. Investment advisers claim every thing under the sky, including PPA of 95 protection (interesting to note that the PPA specifically does not exempt CGAs where commissions are involved). Bottom line - court says CGAs are securities and the advisers need to return the commissions they collected.

It is an interesting read for those interested:

http://www.ca9.uscourts.gov/datastore/opinions/2009/06/24/07-15586.pdf

What startled me was the ease at which a court found CGAs to be securities! And the proof - see the quotes above and read the case - that could be any of our charities promoting CGAs.

A couple more Heritage Foundations or real CGA ponzi schemes, and the world of CGAs could easily be headed to SEC regulations. Pretty scary stuff considering we in the charitable world can barely handle insurance department licensing in California, New York and New Jersey. I would venture to say that SEC regulations would be generally be a deathblow to CGAs as a viable planned giving vehicle. It wouldn't be worth it anymore to be in the business.

This case hits home that we in the planned giving business need to be vigilant to avoid promoting CGAs as financial investments. Who knows what the consequences could be? Maybe a disgruntled donor will demand his/her money back, hire a smart lawyer, and use the investment product/securities issue against your organization. There are legal risks involved in all planned gifts. Leaving our CGA programs open to be lumped into regulated securities is just plain foolish.

The behind the scenes talk I have had with prominent attorneys in this field, since this most recent financial collapse, is how vulnerable planned giving program are to potential law suits. And, this case exemplifies how close CGAs in particular are to be dragged into a whole new realm of legal disasters for charities.

Friday, July 17, 2009

Through the eyes of the gift planner

The job of the gift planner may seem relatively easy sometimes. An "off the radar" donor leaves your organization a whopping bequest - how hard is that? Sign the release and receive the money!

Or, like the call I received this week from an estate planning attorney going to set up a $1 mil+ CRT for his client - sounds easy enough. Think again.

Then the conversation starts with the attorney. He wants our sample form CRT doc's - Harvard gave him some for the previous CRT his did for this donor. Easy enough - I get two vetted samples from a bank - the bank we could use if need be to manage the trust.

Who is going to be trustee? The charity involved doesn't manage any planned gifts, yet. At first, the attorney says he'll take care of it - but in the second conversation, it becomes clear that they (donor and attorney) expect the charity to really do most of the lifting. OK - does this charity kick off its own planned giving program or does it bring the CRT to its system parent (which has a program for its constituents and the bank ready to manage)?

Then the conversation continues. The donor is going to be purchasing wealth replacement life insurance through an Irrevocable Life Insurance Trust (ILIT). The attorney asks me if I have any samples of these? I start to wonder?

I check with the bank that would end up trustee'ing the CRT if they choose to bring it to the system parent. They have personal trust services that do it. What is "it" that needs to be done with an ILIT? Actually, what is an ILIT? In short, it is a device for keeping life insurance death proceeds outside of one's taxable estate by making the ILIT the irrevocable owner of a life insurance policy. Gift transfers happen when the insured contributes annually to the ILIT for the policy premiums - potentially taxable gifts if over various limits. In theory, you could put $1 mil into a CRT, give the income from the CRT to your ILIT which owns a policy for $1 mil - add it up, kids get $1 mil with no estate taxes, charity hopefully gets its $1 mil, donor rec'd an immediate income tax deduction, avoided cap gains on funding stock, maybe gets some extra income in later years, lowered his taxable estate by $1 mil. But, these have to be done right or the whole point could be lost. Annual "crummy" (the legal term from a case by a guy named Crummy) notices letting kids know that they received a gift need to be sent and saved, etc...the IRS loves to knock off these in estates, easy money for them. No charity should ever be involved - it is a personal estate planning tool and risky if not handled right.

This started as "easy as pie" and all of a sudden, it is really complex. You see, we have an attorney that might not be able to do everything his client needs. We have a donor who wants to see this done without big legal bills and fast (even though it has been many years in the making). We have a charity that might have a finance person with the idea that they can kick off a planned giving program with a snap. And, we have an established parent system program with a bank ready to handle everything (wink, wink), even the ILIT for the donor.

The challenge for me is to guide the client and the attorney/donor to a successfully closed gift that makes sense for everyone. From my experience, everything is telling me that we should bring this donor to the parent system's bank and they will do everything - and at reasonable fees. But, it isn't my decision to make (especially since I am only a consultant - a stand-in planned giving director).

On top of everything, the attorney wasn't set on which type of CRT. CRAT or CRUT? In my head, everything is telling me CRAT. I call this "seeing the future." I know what usually happens - CRUTs sound great at first but donors get aggravated when the income fluctuates from year to year, especially when it goes down. And, I am imagining this charity trying to run a CRUT themselves in-house. I don't even want to go there. Yes, these situations are why I am in business but it is still my job help avoid foreseeable problems.

To be in continued next week!

Have a great weekend!

Thursday, July 16, 2009

Welcome and feedback request

I wanted to thank Phyllis Freedman from the http://plannedgivingblogger.wordpress.com/ for posting some of my material on her blog and also thank the new people who have signed up for email updates!

As this is a new endeavor, I am hoping for feedback and questions from readers. This is a work in progress - my goal is to bring planning giving info sharing into the digital age, particularly on the legal/technical side of gift planning.

Let me know what you think. Offer suggestions. Use the "contact me" gadget on the left!

For now, I am going to try and report important/relevant stories (with some of my own commentary) that impact the planned giving and fundraising world, and address interesting gift planning situations. Eventually, I plan to build a library of "how to" articles for those just learning the field (see article links in left column) which could eventually be published as an online book. Every good planned giving consultant needs to publish a book! Let's see if I ever get there.

Monday, July 13, 2009

Harvard Not Going Under - Massachusetts Passes UPMIFA!

Not that anyone from Massachusetts is reading this blog but the following innocuous piece in the Boston Globe is actually major news for places like Harvard:

http://www.boston.com/business/articles/2009/07/03/nonprofits_get_relief_from_endowment_law/


One of the most prominent attorneys in the planned giving world told me several months ago that Harvard was literally teetering over their endowment woes - I can't confirm if they had consulted this particular attorney but it sounded like he had first hand info.

Here is a Wall Street Journal article talking about Harvard's endowment losses at the end of 2008: http://online.wsj.com/article/SB122832139322576023.html. What the article doesn't detail is how much less cash the university would have had as a result of the "freezing" of most of their endowments. To put it in context, a $39 billion dollar endowment could have spun off close to $2 billion a year in various scholarships, program funds, endowed professorships, etc... $2 billion is a lot to make up for, even for Harvard.

Well, the storm is over, Mass has UPMIFA! Those who have been dealing with underwater endowments will understand what I mean.

See previous discussions about this law on this blog for more info.

I wonder when New York will fall in line - at least 34 states now have ENACTED UPMIFA, and only three remain that have not even proposed it. But, in New York, common sense doesn't seem to prevail when it comes to legislation.

Wednesday, July 8, 2009

Credit Where Due - Insurance Does Have a Place in Planned Giving

I am already jaded when it comes to new insurance plans - as my previous posts have shown.

But, I have to give credit when it is deserved.

As mentioned in a previous post, many of us in the planned giving community in New York were bombarded with Fedex'ed invitations and phone calls to attend a gala insurance event (The CHIEF Plan).

The whole thing threw me off. Firstly, the aggressive invitation approach. Secondly, a claim by the promoter that their plan is "patent pending" (one of my main signals that the plan is probably absolutely bogus - not that I know about this one or will ever find out).

What confused me the most was that Peter Fleischmann, the head of the Jewish community foundation in Buffalo and one of the top planned giving professionals around, was a guest speaker at their event.

Finally, last week I was able to speak with Peter and hear what the event was about and see if he had really gotten caught up in one of those schemes we all moan about.

Surprisingly, what Peter described to me was a firm, particularly his contact with them, that did standard insurance things that any decent planned giving program should be considering. Donors sponsoring the premiums on policies that will someday create endowment funds, arbitrage with commercial annuities, careful review and consideration by investment committees, and so on.

Insurance does have a place in planned giving. There will be opportunities that arise where it is the right vehicle for enabling major philanthropic objections. The challenge is to make sure the plans involved are truly vetted by the IRS, not speculative, honest, and worthwhile for all parties involved (not just the insurance salesmen).

I can't understand why these insurance people keep running around saying they have a patent pending or a highfalutin (a real word!) law firm's tax letter or required non-disclosure agreements.

Monday, July 6, 2009

Update on Gift Administration Providers

After writing my previous post, I confirmed that one of my previous programs had also been given the "pink slip." That program had a few million in CRTs and CGAs - CGA program was around $1 million and the CRTs probably totaled $1.5- $2 million.

From previous conversations with BNY/Mellon after they merged, they had said their minimum was basically $5 million, which was the highest I had encountered in the business.

Places like Merrill Lynch, PNC Bank, and Bernstein had indicated that $1 million was generally the threshold to overcome minimum fees. That means that once your assets are over that amount, then the minimum fees are covered in the regular fees charged (otherwise, you would have to pay out of pocket to make up any shortfall in covering the minimums).

This isn't the first time in the planned giving business that clients will be getting fired.

I recall about 10 years ago that one of the "major" promoters of planned giving services dropped numerous clients after a merger. Not pleasant for the charities involved since they were typically subject to very hard sales pitches and lots of promises and then unceremoniously dropped if the accounts weren't profitable enough. And, this same bank came back promoting their services harder than ever, with even more promises a few years later.

In fact, every where I went (i.e. sales pitches), I kept hearing that this same bank says they can provide all of the planned giving "consulting" services to be included in their standard fees. I just wondered if they could really come through on their promises and whether they would really be interested in helping a charity promote bequests which are usually 80% or more of planned gift revenue (see http://www.onphilanthropy.com/site/News2?page=NewsArticle&id=7559 for my article on why Bequests still rule the PG world) in addition to life income vehicles.

Sadly, one of my former clients got suckered into going with this "do it all" bank and found out the hard way that they weren't everything they claimed to be. And, my hunch is that this one unmentioned bank, along with others, will dropping planned giving programs in the near future as struggling banks will be looking to clean house of lesser profitable (or even not profitable) clients.

So, we'll see if this new provider (Cornerstone http://www.cornerstone-companies.com/PlannedGiving.aspx) and others who serve the smaller end of the planned giving market will be ready to step in when the big promisers start breaking their promises.

Thursday, July 2, 2009

Gift Administration Revolving Door Challenge

For those who know me, you should know that I get very excited over planned giving issues that the world would otherwise not consider very exciting.

This week's excitement: Bank of NY/Mellon giving notice to over 50 smaller planned giving programs to pack their bags and get their money out by September 1, 2009.

I have been warning about this for a few years but it is always weird to see your predictions come true.

A little context. Having worked for, with, or consulted to about 200 planned giving programs, I can honestly say that finding a good 3rd party administrator/investment firm is one of the key elements to running a smooth and successful planned giving program. Otherwise, you and other staff will be wasting your time trying to keep up with the checks, mistakes, paperwork, etc.. when there are firms that do it all and the cost is basically included in the investment management fees. More time seeing donors, less time administering - it is a no brainer even if there seems to be some more costs involved.

In the past few years, even before the recent downturn, fewer and fewer such providers have been willing to serve the smaller programs. Minimum total accounts expected were $5 or $10 million. What about the $1 million dollar programs? Or less? The challenge has been to find solutions for those smaller programs when the banks will no longer take on new small ones.

But, what about the programs that got in before the minimums were raised? Bank of NY used to be very flexible as they were building their business. Well, with Mellon now in charge of that program, it seemed like a matter of time before BYN/Mellon would clean house.

And, apparently, they have decided to do this with a hard date of September 1 (announced around June 1). Three months over the summer is not a lot notice for non-profits to find a replacement 3rd party admin/investment adviser - if you ask me.

Interestingly, two folks who had been with Bank of New York planned giving services opened a new provider this past year and seem to be ready to take on all of those smaller programs that don't have many options.

Kudos to Tom Aschoff and Danielle Green for launching a planned giving services program to serve this very under-served market. Here is a link to their web page: http://www.cornerstone-companies.com/PlannedGiving.aspx. From my conversation with them, it seems like they can offer the full range of planned giving administration and investment services - one stop shopping - for less than 100 basis points a year. And, their minimum fee seems reasonable - you'll have to call them yourself for more info.

What I am wondering is who is next to drop planned giving accounts? I am just thinking about all of the promises a few big firms have made to attract new planned giving clients in the past few years and they don't even know if they'll be in business, let alone be able to serve the low margin planned giving world.

Have a great 4th of July to all!